What is a Right of First Refusal?

underwood-right-of-first-refusal-300x300A right of first refusal is, essentially, an option contract. It is a contract or a condition in a contract between the owner of an asset, and some other person with an interest in that same asset, that allows the interested person to buy the asset from the owner instead of allowing the owner to sell it to a third party. Put differently, it’s a conditional right to acquire property, depending on the owner’s willingness to sell. (Campbell v. Alger (1999) 71 Cal.App.4th 200, 206.) 

The classic example is for a long-term lease of a house. There, as part of the lease, the owner provides that the renter has a right of first refusal if they rent for a set amount of years (let’s say five). After those fives years are up, the owner tries to sell the house on the market to a third party. But, because of the right of first refusal, the renter must be allowed to chance to make the same offer as the third party. Only if the renter “refuses” to match the offer is the sale allowed to proceed. 

While the concept itself is rather straightforward, there are many legal complexities that can arise when the right is integrated into other actions concerning property, such as eminent domain proceedings, probate sales, and partitions. 

Thus, having yourself the right lawyer in these situations can make all the difference. At the Underwood Law Firm, our attorneys are well-versed in property rights and partition actions. If you’re having trouble with rights of first refusal, we are here to help.

Does a right of first refusal require a voluntary sale?

It depends. Sometimes, the right will kick with an involuntary sale, other times it will not. But as a general rule of thumb, private property rights cannot be used to get in the way of government action.

For example, in Campbell, two men owned a vast ranch with valuable aggregate used in concrete production. When they acquired the property, they executed a contract between the two of them that established a right of first refusal if either of them tried to sell their interest. 

What neither expected was for the government to come in and initiate condemnation proceedings on half the land via eminent domain. When the other owner tried to invoke the right against the government, the case proceeded to the Second District Court of Appeal, which held that the right did not apply in this instance.

This was because “the purpose of condemnation is to ensure that public entities obtain land needed for public purposes to benefit the community…. Private holders of rights of first refusal may not thwart such public purposes by forcing the owner of the subsequent public entity to sell it to them.” (Campbell, 71 Cal.App.4th at 209.) 

That said, the above should not be construed to mean there are never involuntary sales where the right won’t survive. For example, in Richfield Oil Corp. v. Security-First Nat’l Bank (1958) 159 Cal.App.2d 184, the subject property was proposed to be sold by a Probate Executor to fund the probate proceedings. On appeal, the Second District held that the right of first refusal was delayed by the probate proceedings, but certainly not terminated. 

When is a right of first refusal triggered?

There are two general principles that apply to the timing of rights of first refusal. 

The first is that there must actually be a sale or offer, for value, to a third party. (Pellandini v. Valadao (2003) 113 Cal.App.4th 1315.) This is because, unless stipulated in contract, the right typically applies only on sales to bona fide purchasers. 

For example, take the situation with the renter discussed above. Suppose that instead of selling the house to a third party, the home owner instead deeds the house to his son as a gift. The right of first refusal for the renter would not kick in, because the owner’s son is not a bona fide purchaser. He did not pay value for the home. 

The second important timing principle is regarding notice. The rule goes that unless the holder of the right receives notice of the sale, the right does not terminate. Instead, the holder of the right, upon learning of the sale occurring behind his back, may actually sue both the seller and third party buyer for specific performance to enforce his right of first refusal. (Campbell, 71 Cal.App.4th at 207.)

Does a right of first refusal waive the ability to sue for partition?

The main defense against any partition action is a “waiver.” (LEG Investments v. Boxler (2010) 183 Cal.App.4th 484, 493.) This is because partition is usually a right for any co-owner of property. Thus, there must be some underlying agreement between the owners or third parties that would prevent the exercising of that right. 

As how now been settled by case law, rights of first refusal are usually not waivers of the right to partition, but instead modifications (though, of course, this will depend on the particular words of each right of first refusal contract). 

As such, the cotenant seeking to sell the property via partition must usually first comply with the underlying contract by offering to sell his interest to the holder of the right of first refusal. But the right of first refusal is not, itself, a perpetual waiver of the ability to seek a partition. To hold otherwise would frustrate the policy behind partition actions and property ownership itself, in that ownership implies unencumbered use and alienation of property. (LEG Investments, 183 Cal.App.4th at 497.) 

How the Lawyers at the Underwood Law Firm Can Help

Exercising rights of first refusal can be complicated endeavors, especially in a partition actions. These situations can be stressful, and difficult, especially when the way out is not entirely clear. Fortunately, the lawyers at the Underwood Law Firm specialize in partition actions and solving difficult co-ownership problems, helping good people end bad real estate partnerships. If you have found yourself in one of these situations, then please do not hesitate to contact us today.

Contact Information